Notes to the accounts
for the year ended 31 December 2007
5. Retirement benefit obligations
| The charge for retirement benefit costs is as follows: | 2007 £mn |
2006 £mn |
|---|---|---|
| Pension costs - defined contribution plans | 10.3 | 8.7 |
| Pension costs - defined benefit plans | 0.9 | 6.6 |
| Other post-employment benefits | 0.2 | 0.2 |
| 11.4 | 15.5 | |
| The defined benefit scheme charge in respect of the UK scheme consists of: | ||
| Current service cost | 9.5 | 12.9 |
| Expected return on scheme assets | (35.3) | (29.2) |
| Interest on scheme liabilities | 25.6 | 22.3 |
| Total (credit)/charge in respect of the UK scheme | (0.2) | 6.0 |
| Charges in respect of other defined benefit schemes | 1.1 | 0.6 |
| Total defined benefit scheme charges | 0.9 | 6.6 |
The principal scheme in the UK is the Schroders Retirement Benefits Scheme (the 'Scheme') which is non-contributory and administered by the Trustee. It is a funded scheme comprising a defined benefit section and a defined contribution section. It is open to new entrants and has 313 active members in the defined benefit section and 871 active members in the defined contribution section at 31 December 2007 (2006: 357 and 776 respectively). The most recent triennial valuation of the Scheme was carried out as at 1 January 2006 and disclosed that the market value of the assets of the Scheme represented 98 per cent. of the liability, calculated on the funding ratio basis applicable to the Scheme, for the benefits that had accrued to members at that date allowing for future increases in earnings and pensions.
The Company paid effective contributions to the defined benefit section in 2007 of 40.8 per cent. of pensionable salaries to cover the accrual of ongoing benefits until 1 June 2007 and 35.8 per cent. of pensionable salaries thereafter. For joiners on or after 1 June 1989, pensionable salaries for this purpose were subject to the statutory earnings cap which was in force until April 2006, after which this cap was replaced by a notional earnings cap.
The pension cost under IAS 19 for the defined benefit section of the Scheme has been determined by independent qualified actuaries, Hewitt Bacon & Woodrow Limited, and is based on an assessment of the Scheme as at 1 January 2007. This assessment was carried out using the projected unit method and the principal financial assumptions set out below. Assets were taken at bid value and are held by an independent custodian.
Since the publication of the Group's last Annual Report and Accounts, the Group has changed the cap on inflation linked pension increases for pensions earned from 13 August 2007. Pensions earned in respect of service from this date will increase in line with price inflation capped at 2.5 per cent. per annum. The cap was previously set at 5 per cent. per annum. The effect of this change on the Group's defined benefit section charge for the period is to reduce it by £0.3 million. The Group has not materially changed any of the principal financial assumptions underlying the calculation of the Scheme's net financial position, although such assumptions have been amended where applicable to reflect current market conditions and expectations.
Over the year, the contributions to the defined benefit section of the Scheme totalled £18.9 million (2006: £8.4 million). The balance sheet asset at 31 December 2007 was £42.5 million (2006: £16.8 million). This asset is included within the consolidated balance sheet as the Group, via the employing companies of the Scheme, has an unconditional right to a refund of surplus assets once all members have left the Scheme.
Administration expenses and the levy payable to the Pensions Protection Fund are met directly by the Group. The actual return on Scheme assets was £33.9 million (2006: £43.6 million).
The Group operates a number of smaller pension schemes around the world, some of which are funded defined benefit schemes with valuations performed regularly by qualified actuaries and the actuarial assumptions which vary according to the economic conditions of the countries in which the funds are situated. In addition, there are several defined contribution schemes.
The additional disclosures required by IAS 19 are set out below. Figures shown are for the defined benefit section of the Scheme only.
| (a) Balance sheet assets: | 2007 £mn |
2006 £mn |
|---|---|---|
| Pension benefits | 42.5 | 16.8 |
| (b) Income statement (credits)/charges: | 2007 £mn |
2006 £mn |
|---|---|---|
| Pension benefits | (0.2) | 6.0 |
| Pension benefits The amounts recognised in the balance sheet are determined as follows: |
2007 £mn |
2006 £mn |
|---|---|---|
| Present value of funded obligations | (512.8) | (500.8) |
| Fair value of plan assets | 555.3 | 517.6 |
| Net asset recognised in the balance sheet | 42.5 | 16.8 |
Scheme assets do not include any of the Company's shares (2006: nil) or buildings occupied by the Group (2006: nil).
The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense is a £9.3 million gain (2006: £2.7 million gain).
The expected rates of return on individual categories of Scheme assets (net of investment expenses only) are determined by reference to the following:
Bonds - based on an outperformance of 0.1 per cent. (2006: 0.5 per cent.) per annum above the yield on long-dated government bonds at the balance sheet date.
Equities - based on an outperformance of 3.3 per cent. (2006: 3.5 per cent.) per annum above the yield on long-dated government bonds at the balance sheet date.
Liability-matching - based on an outperformance of 0.4 per cent. (2006: 0.5 per cent.) per annum above the yield on long-dated government bonds at the balance sheet date.
Other - based on the long-term expected return on cash implied by swaps yields (2006: based on the UK three-month deposit rate).
The movement in the present value of the defined benefit obligation during the year is as follows:
| 2007 £mn |
2006 £mn |
|
|---|---|---|
| At 1 January | 500.8 | 471.7 |
| Current service cost | 9.5 | 12.9 |
| Interest cost | 25.6 | 22.3 |
| Actuarial (gains)/losses | (8.0) | 8.8 |
| Benefits paid | (15.1) | (14.9) |
| At 31 December | 512.8 | 500.8 |
The movement in the fair value of Scheme assets during the year is as follows:
| 2007 £mn |
2006 £mn |
|
|---|---|---|
| At 1 January | 517.6 | 480.5 |
| Expected return | 35.3 | 29.2 |
| Actuarial (losses)/gains | (1.4) | 14.4 |
| Contributions by employer | 18.9 | 8.4 |
| Benefits paid | (15.1) | (14.9) |
| At 31 December | 555.3 | 517.6 |
The fair value of Scheme assets at the balance sheet date is analysed as follows:
| 2007 £mn |
20061 £mn |
|
|---|---|---|
| Equity instruments2 | 274.3 | 264.1 |
| Debt instruments | 33.2 | 24.1 |
| Liability-matching assets | 202.1 | 171.3 |
| Other assets3 | 45.7 | 58.1 |
| 555.3 | 517.6 |
1Comparative amounts have been restated to present the liability-matching assets as a separate line item.
During 2005, the Scheme's investment policy was reviewed with the aim of ensuring that the Group's ability to meet its benefit payments was better matched to its assets, both currently and in the future.
A new investment strategy was implemented in March 2006 by putting 35 per cent. of the Scheme's assets into liability-driven investments (including bonds and derivatives such as interest rate and inflation swaps and cash) so as to match the profile of the Scheme's liabilities. The remaining 65 per cent. is invested in a diversified portfolio of growth assets with an allocation of approximately 40 per cent. to equities and 25 per cent. to a range of other asset classes, including property, private equity, hedge funds, commodities, currency, high yield and emerging market bonds. The combination and the spread across the different asset classes has been designed to reduce risk while still generating an expected return in excess of the cost of meeting the Scheme's liabilities.
The principal financial assumptions used were as follows:
| 2007 % |
2006 % |
|
|---|---|---|
| Discount rate | 5.7 | 5.2 |
| Inflation rate | 3.1 | 2.9 |
| Future salary increases | 4.6 | 4.4 |
| Future pension increases (for benefits earned before 13 August 2007) | 3.1 | 2.9 |
| Future pension increases (for benefits earned after 13 August 2007) | 2.3 | 2.3 |
| Expected return on Scheme assets analysed as1: | ||
| Equities | 7.8 | 8.3 |
| Bonds | 4.6 | 5.0 |
| Liability-matching assets | 4.9 | 5.0 |
| Other assets | 5.3 | 5.4 |
| Number of years a current pensioner is expected to live beyond age 60: | ||
| Men | 28 | 26 |
| Women | 30 | 29 |
| Number of years future pensioners currently aged 45 are expected to live beyond age 60: | ||
| Men | 30 | 27 |
| Women | 31 | 30 |
1Comparative amounts have been restated to present the liability-matching assets as a separate line item.
The history of the Scheme is as follows:
| 2007 £mn |
2006 £mn |
2005 £mn |
2004 £mn |
|
|---|---|---|---|---|
| Present value of defined benefit obligation | (512.8) | (500.8) | (471.7) | (419.5) |
| Fair value of Scheme assets | 555.3 | 517.6 | 480.5 | 388.6 |
| Surplus/(deficit) in the Scheme | 42.5 | 16.8 | 8.8 | (30.9) |
| Experience adjustments on Scheme liabilities | (0.6) | (1.0) | 10.1 | (1.4) |
| Experience adjustments on Scheme assets | (1.4) | 14.4 | 34.8 | 8.1 |
The amounts under IAS 19 that have been recognised in the statement of recognised income and expense (‘SORIE’) are set out below:
| 2007 | 2006 | |||
|---|---|---|---|---|
| £mn | % | £mn | % | |
| Actual return less expected return on Scheme assets | (1.4) | 14.4 | ||
| % of year-end market value of assets | (0.3) | 2.8 | ||
| Experience gains and losses arising on Scheme liabilities | (0.6) | (1.0) | ||
| % of year-end present value of Scheme liabilities | (0.1) | (0.2) | ||
| Changes in assumptions underlying the present value of the Scheme liabilities | 8.6 | (7.8) | ||
| % of year-end present value of Scheme liabilities | 1.7 | (1.6) | ||
| Actuarial gains recognised in SORIE | 6.6 | 5.6 | ||
| % of year-end present value of Scheme liabilities | 1.3 | 1.1 | ||
The sensitivity of the 2007 pension liabilities to changes in assumptions are as follows:
| Assumption | Assumption change | Estimated reduction in pension liabilities £mn |
Estimated reduction in pension liabilities % |
|---|---|---|---|
| Discount rate | Increase by 0.5% per annum | 48.4 | 9.4 |
| Expected rate of salary increases | Reduce by 0.5% per annum | 3.2 | 0.6 |
| Expected rate of pension increases in payment | Reduce by 0.5% per annum | 31.5 | 6.1 |
| Life expectancy | Reduce by one year | 11.8 | 2.3 |
Membership details as at 31 December 2007 are as follows:
| Active workers | 313 |
| Total pensionable salary roll | £23.1 million per annum |
| Average age (active) | 43 |
| Average service in plan | 10.5 years |
| Number of deferred members | 1,482 |
| Total deferred pensions (at date of leaving Scheme) | £9.6 million per annum |
| Average age (deferred) | 45 |
| Number of pensioners | 591 |
| Average age (pensioner) | 67 |
| Total pensions in payment | £12.9 million per annum |
| The Group expects to make contributions totalling approximately £11.9 million to the Scheme in 2008. Contributions to cover the accrual of ongoing benefits in the Scheme are made on a monthly basis. | |